In “Will U.S. Treasuries Be the Next Asset Bubble to Burst?”, Nouriel Roubini writes:

In 2009, any signs of a less than dire economic outcome as deflation may burst the bubble in Treasuries.***

This bubble is motivated by fear rather than greed. Investors are seeking to protect themselves against deflation and declining stock markets by blindly acquiring “risk-free” government bonds [Financial Times – “FT”]

Institutional investors also contributed to the bond bubble. Pension funds, insurers and others have sold off toxic securitized triple-A rated bonds and replaced them with Treasuries. Government bonds are attractive for diversification purposes since they have held up while just about everything else in their investment portfolios has collapsed (FT)

The Federal Reserve’s signals that it might buy longer U.S. government maturities added momentum to the epic rally (FT)

The median forecast of 19 primary dealers is that 10yr bond yields will rise to 3% and 2yr yields will rise to 1.2% in 2009 (Bloomberg)

Because of the low income on Treasury securities, it would take only a small rise in yields for total returns on Treasuries to turn negative (Merrill)

Given the level of extension in yields, it would not be difficult to generate losses of say 10% in the 10-year Treasury bond, and as much as 20-25% in the 30-year Treasury bond over a very short period of time [Hussman Funds – “Hussman”]

If the dollar holds steady, Treasury bond prices are likely to plunge; if Treasury prices hold steady, the value of the dollar is likely to plunge. Either way, foreign holders of Treasury securities are facing probable losses, and they know it (Hussman)

The specter of deflation and Japan’s experience in the 1990s suggest bond yields could fall significantly further â€“ 10yr JGB yields went on to find a low of 0.45% despite massive fiscal stimulus. Ironically, it was the start of quantitative easing in March 2001 when yields ticked up (JPMorgan)

While Roubini does not explicitly talk about shorting long-term treasuries, as do Marc Faber and Jim Rogers, he does appear to believe that the long-term treasury bubble will likely burst. However, this is subject to two large caveats:

(1) If the economic situation remains dire, the treasury bubble may continue for a while; and